THE Global Justice Movement Website

Wednesday, November 30, 2011

What baffles many people who take the "capitalist/individualist" side today is the claim that the Just Third Way is not socialist, even though there is a strong objection to concentrated ownership of capital in private hands. The only people even more puzzled about the Just Third Way are the socialists/collectivists, who believe that any system that appears to subordinate their demand for a guarantee of an adequate material life for all to humanity's natural rights of life, liberty and property is necessarily capitalist.

Consciously or not, both sides take for granted that humanity is either socialist/collectivist, or capitalist/individualist. No other arrangement is possible. Thus, whatever is not socialism must be capitalism, and whatever is not capitalism, must be socialism.

This belief is conditioned primarily by two assumptions. One assumption is the conviction that humanity is either a social creature or an individual. There is no appreciation of what Aristotle meant by his statement in The Politics that "man is by nature a political animal" — a possibly unique combination of individual and social. The politikos bios — the life of the citizen in the State — is an arrangement of the common good by means of which individual rights are only truly realized within a social context. The art of politics involves arranging the institutions of society to optimize the exercise of individual rights within a framework that naturally and necessarily takes into account not only the rights of the individual, but of other individuals, groups, and the common good (that network of institutions within which we exercise rights and so acquire and develop virtue) as a whole.

The other assumption is the idea that the only way to finance new capital formation is to cut consumption, accumulate money savings, then invest. This necessarily restricts ownership of all new capital either to private individuals who have been fortunate enough already to have wealth and can afford to cut consumption, or to the State, that presumably has the power (as John Maynard Keynes put it) to re-edit the dictionary, that is, change what it means for something to be a right, thereby controlling who may "own" and how that "ownership" may be exercised.

In view of these two assumptions, society seems locked into an irreconcilable conflict between individualism/capitalism on one hand, and collectivism/socialism on the other. In the analysis of Orestes Brownson, the American Civil War brought this conflict to its highest pitch.

In Brownson's opinion, the conflict between individualism and collectivism had been present from the beginning of the United States. Both were in contrast to the system embodied in the Constitution. The individualist element had been strong from independence up to the Civil War. The most obvious representation of this was slavery, according to de Tocqueville the only serious problem with democracy in America. The collectivist element had, however, been gaining strength, largely through opposition to slavery. It was to gain ascendancy after the war in reaction against the growing power of the industrial and commercial sectors, the ownership of which was rapidly becoming concentrated at an accelerating rate. While Brownson died in 1876, he would not have been surprised — although possibly profoundly shocked — at the degree to which American society has managed to take on the worst aspects of both capitalism and socialism, the latter not unjustly termed "State capitalism."

Brownson was adamant that slavery was a profound evil, and that the abolitionists were right in opposing it. Where they were wrong, he believed, was in opposing slavery on "humanitarian" or "socialistic" grounds. Slavery was wrong not because it was cruel and inhuman. Life itself, in many respects, is cruel and inhuman. Slavery is wrong because it is contrary to human nature, constituting an unnecessary cruelty, "a barbaric element, . . . in direct antagonism to American civilization."

Even then, slavery was abolished not on humanitarian grounds, but because abolition was an effective weapon in the fight to save the Union. Thus, as far as Brownson was concerned, the right thing was done, but for the wrong reason. Political pragmatism had won out over both socialist humanitarianism and capitalist individualism, as well as the true American spirit and philosophy. Ironically, this led to the belief that capitalist expedience, rather than socialist humanitarianism was the ruling philosophy of America, a conclusion seemingly validated by the rapid commercial and industrial expansion after the war. Paradoxically, this led to the widespread belief that socialism, albeit under many names and in many forms, is the only possible remedy to the horrors of capitalism.

Not that Brownson, despite his condemnation of socialism, was "soft" on capitalism. He viewed them as two sides of a very bad coin. This non-Catholic and thus non-American philosophy imposed actual slavery in the south, and virtual slavery in the north through the wage system. With respect to the material condition of the non-owning worker he believed that chattel slavery was better for the worker than wage slavery — a conclusion with which you are free to disagree, but it illustrates what are, in Brownson's eyes, the chief evils of the wage system. An owner of men has, at least, to keep the people who are his property alive even when they are not working if he hopes to remain profitable. The propertyless free worker, however, is on his own, free to starve, if nothing else, and the employer of nominally free men makes more profit the worse he treats his workers — in the short run. In an analysis that Brownson could have lifted directly from Aristotle, he stated,

"In regard to labor two systems obtain; one that of slave labor, the other that of free labor. Of the two, the first is, in our judgment, except so far as the feelings are concerned, decidedly the least oppressive. If the slave has never been a free man, we think, as a general rule, his sufferings are less than those of the free laborer at wages. As to actual freedom one has just about as much as the other. The laborer at wages has all the disadvantages of freedom and none of its blessings, while the slave, if denied the blessings, is freed from the disadvantages. We are no advocates of slavery, we are as heartily opposed to it as any modern abolitionist can be; but we say frankly that, if there must always be a laboring population distinct from proprietors and employers, we regard the slave system as decidedly preferable to the system at wages." (Orestes Brownson, "The Laboring Classes," The Boston Quarterly Review, July 1840.)

Brownson might as well have added, "own or be owned." As it was, the Civil War created the illusion that the northern version of capitalism had won, but this — at least in Brownson's eyes — was no victory. All it did was give socialism its justification, and provide the basis for the gradual implementation, decades later, of social welfare programs that eventually bankrupt the State in an effort, as Goetz Briefs noted, to save capitalism by having the State guarantee each person's material welfare.

Nevertheless, in 1865 Brownson, while he could see the dangers of the spread of propertylessness among the great mass of people, saw great promise in the Homestead Act. He likened it to the spread of the benefits of the Roman Republic to every inhabitant in the empire — only on a more just and equitable basis. He continued to hold fast to what he believed to be the true American philosophy found in the Constitution, especially what in the framework of the Just Third Way is called the "Four Pillars of an Economically Just Society":

1. A limited economic role for the State,

2. Free and open markets as the best means of determining just wages, just prices, and just profits,

3. Restoration of the rights of private property, especially in corporate or other business equity, and

4. Widespread direct ownership of capital.

A Limited Economic Role for the State

As far as Brownson was concerned, the State's role is to protect individual rights, but within a strong juridical framework that respects human liberty and dignity. As he explained, "its mission is not so much the realization of liberty as the realization of the true idea of the State, which secures at once the authority of the public and the freedom of the individual — the sovereignty of the people without social despotism, and individual freedom without anarchy. In other words, its mission is to bring out in its life the dialectic union of authority and liberty, of the natural rights of man and those of society. . . . The American republic has been instituted by Providence to realize the freedom of each with advantage to the other."

Free and Open Markets

A free market is not one in which "anything goes," but one to which everyone has equal access and equal rights to participate. Brownson saw a free market — "commerce" — as essential to a government of sovereign people. "[I]t was necessary to place [commerce] under the General government, in order that laws on the subject might be uniform throughout the Union, and that the citizens of all the States, and foreigners trading with them, should be placed on an equal footing, and have the same remedies."

Restoration of Private Property

When Brownson wrote, in 1865, the serious inroads that would be made on private property even as soon as 1873 with the "Slaughterhouse Cases" were far from evident. The war had been fought — in part — to secure natural rights to people who had been deprived of their exercise. Still, Brownson appears to have had an inkling of what could come, for he stressed the importance of protecting natural rights many times, e.g., "Communion with God through Creation and Incarnation is religion, distinctively taken, which binds man to God as his first cause, and carries him onward to God as his final cause; communion through the material world is expressed by the word property; and communion with God through humanity is society. Religion, society, property, are the three terms that embrace the whole of man's life, and express the essential means and conditions of his existence, his development, and his perfection, or the fulfillment of his existence, the attainment of the end for which he is created." This is a concise description of the role and importance of religious society, civil society and domestic society in the politikos bios.

Widespread Capital Ownership

Private property in capital was for Brownson the underpinning of a free and democratic society, providing the foundation for the family, the basic unit of society. In America, the people govern — both implying and requiring widespread ownership of capital. As Brownson explained, "The right to govern rests on ownership or dominion. Where there is no proprietorship, there is no dominion; and where there is no dominion, there is no right to govern. Only he who is sovereign proprietor is sovereign lord."

Interestingly, Brownson's analysis of the U.S. Constitution, even flawed as it is in parts by an incomplete understanding of Catholic political philosophy (a weakness Brownson himself admitted) — except for his evident admiration of James Madison — bears a strong resemblance to that of William Winslow Crosskey (1894-1968) possibly the greatest Constitutional scholar of the 20th century. This is understandable. Both men seemed to have an almost inborn sense of the natural law that necessarily underpins any sound government or State. Applying Aristotelian and Thomist common sense in their respective analyses (even if unconscious of the provenance of the principles they employed), leads to similar, if not identical conclusions.

Crosskey used different words, but he expressed the same sentiments in his monumental Politics and the Constitution in the History of the United States (1953). As Brownson reflected,

"The United States, or the American Republic, has a mission, and is chosen of God for the realization of a great idea. It has been chosen not only to continue the work assigned to Greece and Rome, but to accomplish a greater work than was assigned to either. In art, it will prove false to its mission if it do not rival Greece; and in science and philosophy, if it do not surpass it. In the State, in law, in jurisprudence, it must continue and surpass Rome."

Tuesday, November 29, 2011

Following the American Civil War the danger represented by the twin evils of capitalism and socialism became increasingly evident. Abraham Lincoln's 1862 Homestead Act forestalled the spread of both for a while, but by 1893, as Frederick Jackson Turner pointed out, the "free land" available under the Act had to all intents and purposes run out. The effect on the American spirit was profound, even to the extent that, as far as Turner was concerned, it meant the end of democracy — and democracy in America, as Alexis de Tocqueville had pointed out in the 1830s, seemed custom-made to foster Catholic political and moral principles (if not the Catholic faith) in both public and private life.

After the war, the reaction against the obvious injustices of industrial, commercial and financial capitalism took two forms. In the west, with its tradition of widespread ownership of landed capital fostered by the Homestead Act, and the south, where the emphasis had always been on agriculture, the reaction took the form of populism. In the east, where economic growth was not generally land based, and there was no industrial or commercial Homestead Act to slow the trend, the rise of the proletariat caused the reaction to take the form of socialism. As the opportunity to own land disappeared, populism began to merge with socialism, obscuring differences, causing confusion, and giving capitalism in contrast a credibility it didn't deserve.

The affinity of the American system with Catholicism was only the case so long as ordinary people had access to the means of becoming owners of landed, commercial, or industrial capital. The Homestead Act had, for a while at least, made landed capital available on relatively easy terms. There was, however, no provision for making the rapidly expanding commercial and industrial frontier equally available. "Power," as Daniel Webster had observed in the Massachusetts Constitutional Convention of 1820, "naturally and necessarily follows property." As the land ran out and there was little or no access to the means of acquiring and possessing the new commercial and industrial capital, the American people became increasingly proletarian — and increasingly tempted by the glamour of socialism.

The financial system installed by Lincoln's Secretary of the Treasury Salmon P. Chase and his inflationary monetary and fiscal policies implemented to finance the Union war effort seemed designed to concentrate ownership of big business by providing it with adequate credit. At the same time, the system severely restricted the amount of capital credit available to farmers, ranchers and small businessmen. The British Bank Charter Act of 1844, on which the United States National Bank Act of 1863 was modeled, ensured that industrial and commercial interests could draw bills of exchange which, when accepted, created all the money necessary to finance economic development on a large scale. At the same time, the restriction of the banknote currency in the United Kingdom, and the policy of deflation followed in the United States after the Civil War to restore parity of the paper currency with gold ensured the disappearance of the existing accumulations of savings on which the farmers and small businessmen relied for financing new capital formation.

Consequently, Brownson saw the American Civil War as much larger than a fight to free the slaves or save the Union. It was that, of course, but even more in Brownson's eyes it was a titanic struggle for the soul of America, a nation that, inexplicably to many people today, the popes seem to have singled out for a special role in the destiny of humanity. In The American Republic (1865), his magnum opus, Brownson saw the war as being between individualism/capitalism and collectivism/socialism on the one hand, and the "catholic principles" embodied in a true understanding of the Constitution on the other. As he explained,

"I write throughout as a Christian, because I am a Christian; as a Catholic, because all Christian principles, nay, all real principles are catholic, and there is nothing sectarian either in nature or revelation. I am a Catholic by God's grace and great goodness, and must write as I am. I could not write otherwise if I would, and would not if I could. I have not obtruded my religion, and have referred to it only where my argument demanded it; but I have had neither the weakness nor the bad taste to seek to conceal or disguise it. I could never have written my book without the knowledge I have, as a Catholic, of Catholic theology, and my acquaintance, slight as it is, with the great fathers and doctors of the church, the great masters of all that is solid or permanent in modern thought, either with Catholics or non-Catholics." (Orestes A. Brownson, "Preface," The American Republic.)

The war marked a turning point in what it meant for this country to be the United States. Whether that change was for good or for ill, however, would be determined in Brownson's analysis by whether the country would begin the seemingly inevitable pendulum swing between capitalism and socialism as a result of basing financing for economic growth on past savings, or whether it would find its soul in the application of Catholic social principles of life, liberty (freedom of association/contract), property, and the pursuit of happiness — the acquisition and development of virtue.

Monday, November 28, 2011

He is almost forgotten today, but at one time Orestes A. Brownson (1803-1876) was a force to be reckoned with. John A. Hardon described him as "one of the most admired — and most controversial — figures of the nineteenth century." A giant intellect, he was renowned as one of the "Big Three" American Transcendentalists, ranking with Thoreau and Emerson. In some ways he surpassed them. He, of course, lost his ranking when he converted to Catholicism, and almost immediately began to annoy both Catholics and Protestants by espousing unpopular ideas that, contrary to the spirit of those times and ours, happened to be true.

Chief among the unpopular ideas Brownson championed was that neither individualism (capitalism) nor collectivism (socialism) had the truth, but of the two, socialism was by far the worst. As far as Brownson was concerned, socialism is "as artful as it is bold," establishing and maintaining itself by lies and deceit. As he characterized this insidious evil,

"[Socialism] wears a pious aspect, it has divine words on its lips, and almost unction in its speech. It is not easy for the unlearned to detect its fallacy, and the great body of the people are prepared to receive it as Christian truth. We cannot deny it without seeming to them to be warring against the true interests of society, and also against the Gospel of our Lord. Never was heresy more subtle, more adroit, better fitted for success. How skillfully it flatters the people! It is said, the saints shall judge the world. By the change of a word, the people are transformed into saints, and invested with the saintly character and office. How adroitly, too, it appeals to the people's envy and hatred of their superiors, and to their love of the world, without shocking their orthodoxy or wounding their piety! Surely Satan has here, in Socialism, done his best, almost outdone himself, and would, if it were possible, deceive the very elect, so that no flesh should be saved." (Orestes Brownson, Essays and Reviews Chiefly on Theology, Politics, and Socialism, 1852.)

Reading this, we can understand why, unlike capitalism, the Catholic Church explicitly condemns socialism in all its forms. Capitalism may be bad, but socialism is deadly. Capitalism distorts nature, where socialism would destroy it. As Pius XI declared in words often cited and even more often ignored or misunderstood, "If Socialism, like all errors, contains some truth (which, moreover, the Supreme Pontiffs have never denied), it is based nevertheless on a theory of human society peculiar to itself and irreconcilable with true Christianity. Religious socialism, Christian socialism, are contradictory terms; no one can be at the same time a good Catholic and a true socialist." (Pius XI Quadragesimo Anno ("On the Restructuring of the Social Order"), 1931, § 120.)

Why, however, in a country that seemed to take inordinate pride in its individualism and adherence to capitalism, would Brownson be so concerned with the dangers of collectivism and socialism? It would make more sense (at least to the modern mind) if he had joined with Karl Marx and the other giants of 19th century socialism, and condemned the growing evils of industrial and commercial — to say nothing of financial — capitalism.

The problem was that, just as today, no one but a few misguided ideologues was under the illusion that capitalism was anything but bad. Even many of today's apologists for capitalism frequently agree that, with the past savings paradigm (paraphrasing Churchill on democracy), capitalism is the worst possible system . . . except for all the others.

Socialism, however, has always managed to hide its evil, usually disguising itself as "an angel of light," seeming — as Brownson put it — so fair as to "deceive the very elect." No, there was little danger that anyone would mistake capitalism for anything other than what it is. There was — and remains — every danger that multitudes will welcome socialism as the savior of the world. It feeds on pride, arrogance, and envy, a veritable cornucopia of deadly sins, custom-made to destroy the soul of an individual or a country.

Friday, November 25, 2011

There are some very interesting things happening in Ireland right now. The "Irish Executives Network" (below) just had a contest to solicit suggestions on how to "inspire Ireland" to get out of the current economic malaise. We, of course, got our entry in as "Equity Expansion International, Inc.," which (as you know) is the for-profit business that works to implement Just Third Way structural reforms in companies, states/provinces, countries and regions.

Ireland is, frankly (aside from the U.S.), almost the ideal place to implement Capital Homesteading. Ireland and the U.S. share a common language (although it does seem to sound better coming from them), have similar legal systems, culture, and so on. Ireland is part of the European Union, but is uniquely positioned to serve as a model for both Europe and the Americas, having ties pretty much around the globe.

Do we expect to win? Define "win." The contest was clearly directed toward individual business endeavors, while EEI's "product" is restructuring an entire economy. We're thus in a "win-win" situation. If we don't get a prize, that's okay — we'll settle for having been given the chance to present the Just Third Way as a possible solution to what troubles Ireland (and the rest of us) to some people who just might be in a position to do something constructive. We did get to a TD (a legislator) a while back, but a scandal broke and there was no follow-up. Fortunately, the caliber of people we've seen in the Irish Executives Network can't help but see the advantages of applying Just Third Way reforms to the Irish economy by adopting Capital Homesteading — thereby showing the U.S. how it's done.

We should, in fact, win by losing. The people running the contest are clearly going to feel so bad about giving the prizes to other people and organizations that they'll study the Just Third Way and Capital Homesteading far more intensely than they otherwise would have. Then they'll just have to pick up the phone and give Norman Kurland a call — contact information on the website. (If he can spend hours on the phone talking to Labour Party people in London and South Africa, and days tramping around Capitol Hill dropping in on various Congressmen and Senators, he can give the Irish equal time.)

Not that Ireland is our sole focus. Here's what else we've been doing this past week:

• As noted above, EEI entered the "Inspire Ireland" contest run by Irish Executives Network. This LinkedIn group — and a significant number of others — exhibit to a high degree the organizing for social justice for which Pope Pius XI called in Quadragesimo Anno (1931) and Divini Redemptoris (1937). A good "handbook" for this kind of thing is available for free from CESJ in .pdf: CESJ co-founder Father William Ferree's Introduction to Social Justice (1948). Get yours today.

• The Irish certainly seem to be waking up to the need for acts of social justice (which we hope they will be communicating to their "separated brethren" in the U.S.) We are preparing a piece for possible profiling (in a good way) in the "Irish Abroad" LinkedIn group. It should be ready for submission next week.

• CESJ had a meeting of the core group of the Coalition for Capital Homesteading. The focus was on the need to come up with some "emotional" points to sign the petition for the U.S. Congress (or any other legislature, city council, civic or religious group around the globe, for that matter) to adopt a (non-binding) resolution in support of the Declaration of Monetary Justice. There is also a need for each member of the Coalition to come up with three possible "action items" to further the cause of economic justice for all.

• To our great pleasure, we heard this past week from John Moorehouse, founder, publisher and editor of the Catholic Men's Quarterly that has been on hiatus for the past couple of years. He's back, and getting the magazine back on track. He also has some interesting ideas that groups can use for fundraising. His orientation is clearly Catholic, but other groups might find the old "Classic Comics" (remember them?) both interesting and useful for fundraising purposes. Here's the link to his organization.

• We're putting the revision of Capital Homesteading for Every Citizen aside for a couple of months. There are relatively few areas that need a little "tweaking," such as some of the language and explanation about money, credit, banking and finance, and some of the rough projections should be updated, but the principles are there, and can easily be adapted to any economy in the world. We'll be focusing on getting the English revision of Curing World Poverty up and running, from which the current Chinese translation will be corrected, and then published by an academic press in China.

• We have a meeting scheduled next week with an official from one of the local universities to discuss putting CESJ's core group in touch with academics, legislators and various good-people-to-be-in-touch-with. It should be a very productive meeting.

• Norman Kurland received Thanksgiving greetings from the Polish journalist with ties to Poland's central bank who interviewed him a while back for a feature article in a Warsaw newspaper, who reported a short time ago that the former head of the central bank had been investigating Capital Homesteading monetary and tax reforms and was impressed with them. This is particularly interesting in that last week the Wall Street Journal reported that Poland has avoided the "recession," has kept its public debt down to 55% of GDP, and is looking to reduce it further, at the same time focusing on providing liquidity to the private sector instead of government to finance growth.

• As of this morning, we have had visitors from 56 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Bulgaria, and Australia. People in Australia, India, Germany, Singapore, and Austria spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "It's the Academics v. the Politicians . . . v. Economic Reality, Part I: Accounting," "How Joe Lunchbucket Could Get Money for Capital Homesteading," "Aristotle on Private Property," and "The Keynesian Multiplier."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Wednesday, November 23, 2011

There's an old joke about advanced ("post graduate") degrees that is expressed in a number of ways. One way — the way we first heard it — is that the BS stands for just what you'd expect, the MS is more of the same, while the Ph.D. is "Piled Higher and Deeper." Another way of putting it is that goal of modern education is to know more and more about less and less until you reach the ultimate goal of knowing everything about nothing. Just as in politics.

Today's politicians and economists are, according to those criteria, the best-educated people in the world. Knowing everything about nothing, and having piled their nothingness as high and as deep as it is possible for people to take (and, in an increasing number of places throughout the world, so deep that people are swimming in it), the best that any of them can come up with is to engage in an endless back-and-forth (or, for variety, forth-and-back) within the extremely limited current paradigm.

"You must cut spending and increase taxes!" insist those on one side. "You must increase taxes and cut spending!" trumpet those on the other side. Without first having settled whether they need to cut spending and increase taxes, or increase taxes and cut spending, the discussion devolves into how much of either they aren't going to agree on. As the "supercommittee" demonstrated, this gets you nowhere at a very slow pace.

The answer is not to decrease State spending or increase taxes, although both may be necessary in the short run (although sometimes not quite as necessary as those who want to spend the money would have us believe), but to rebuild the tax base. Fiddling with government spending and taxes puts the cart before the horse. You can't reduce spending from what you don't have in the first place, and you can't tax what isn't there.

So much for the clichés. Not to sound too simplistic, but indications are that the situation could be reversed relatively quickly by focusing on three institutions that, in their current flawed state, inhibit and (in some cases) actually prevent economic growth. Stop me if you've heard this:

1. Methods of Corporate Finance. The economy must be freed from what Louis Kelso and Mortimer Adler called the slavery of past savings. New capital formation should be financed out of "future savings," meaning the profits realized from the increase in the production of marketable goods and services in the future, not reduction in consumption in the past. The present value of future savings can be monetized and used to finance new capital formation by drawing bills and discounting them with other merchants or businesses, or at commercial/mercantile banks, and rediscounting the bills at the central bank. This is a sounder basis for the money supply than the mortgage on future (possible) tax collections that are represented by backing the money with government debt.

2. Reform of the Tax System. All taxes are disincentives to production, but some are worse than others. The VAT is a strongly regressive tax, falling most heavily on those least able to pay. The progressive income tax is even more of a disincentive, as it encourages non-productive government spending, and discourages spending income on consumption. Worse, from a financial point of view, it encourages the rich to reinvest their income in order to gain whatever tax breaks are available for that, which reduces the consumption demand that, ultimately, drives the economy. Switching to future savings instead of past savings to finance growth removes the need for reinvestment, while a single tax rate on ALL income above a meaningful (i.e., enough to meet common domestic needs adequately) income level would walk the middle ground between regressive and progressive taxation.

3. Expanded Capital Ownership. Most important of all, people who currently own no means of production other than their own labor must become owners of a capital stake sufficient to generate enough income first to pay for the capital itself, then to provide consumption income to supplement and, in some cases, replace wage and welfare income.

Of course, all of this (and much more) is available in the book, Capital Homesteading for Every Citizen. You can get it for absolutely free, or (if you insist) it can be purchased on Amazon or Barnes and Noble. And it (and other CESJ publications) are available in the U.K. and Australia, so there's no excuse for not reading it.

Tuesday, November 22, 2011

In the early 17th century, Thomas Wentworth, earl of Stafford (then Viscount Wentworth), was appointed Lord Deputy of Ireland to see how much money he could wring out of the native Irish, the Anglo-Irish, the new Scots and English settlers, and anybody else who came into view. Charles I, like all the Stuarts, was perennially short of cash. He felt he could rely on his favorite to bring home the bacon. That everybody knew pretty much what to expect is demonstrated by a diary entry by Sir Edward Denny, a Protestant "planter" in the southwest of Ireland, in which he wrote, "The Lord Viscount Wentworth came to Ireland to governe the kingdom. Manie men feare."

Regular readers of this blog may have shared similar sentiments if they read yesterday's Wall Street Journal, page A5, and saw the headline, "Economists Get an Online Platform for Policy Debates." As the article relates, "A new website is assembling what it calls 'the world's best economics department'." The idea is "to give prominent academic economists a louder and unfiltered voice in key public policy debates."

Haven't we suffered enough?

The idea that "prominent academic economists" should have a "voice" "unfiltered" through the tortured minds of politicians misled by their theories but trying to force them to work at all costs, or — di imortales! — the poor boobs in the street who have to live in the wreckage that politicians and "prominent academic economists" have made of the economy, boggles the imagination. It is a little like promoting Brian Horeck or Rosellen Price for the Nobel Prize in literature. Yet academic economists get the Nobel Prize in economics for work that, in comparison, makes Horeck and Price look like actual writers.

For those of you blessed enough never to have heard of either of these two literary miscreants, Brian Horeck is the "author" (and we use the term very loosely) of Minnow Trap and Frozen Beneath. One reviewer (after he finished throwing up) described Minnow Trap as not merely bad, but incompetent. He described Horeck as the Ed Wood of literature. Frozen Beneath is worse.

Rosellen Price, "author" of Blood and Wine and two horrifyingly bad sequels, was begged by one reviewer to stop, please just stop writing for the love of God, while another wanted to slap her face for pushing her [expletives deleted] on to an unsuspecting public.

Dorothy Parker would not merely have flung these execrable "novels" against the wall with great force, she would have invaded northern Ontario to do Mr. Horeck in personally (preferably by strangulation after chewing off the hands with which he wrote), and taken out a contract on Ms. Price, a privilege for which the Mob would have paid her.

Please do not read these books in a vain effort to prove us wrong. We'll take the late James Theis's sincere, if so bad it really is funny, The Eye of Argon (written when he was 16) any day of the week. Of course, Theis was so humiliated by the ridicule heaped upon his novel (actually a short story, written in honor of Robert E. Howard's "Conan the Barbarian"), some of it undeserved, but none of it actually cruel, that he never wrote another word of fiction as long as he lived. Despite — or because of — that, he became a legend among the fen. (Plural of "fan"; if the plural of "man" is "men," then the plural of "fan," at least in the fannish community, must be "fen." Look it up if you don't believe me.)

Would that Horeck and Price followed Theis's example . . . or (better yet), the "prominent academic economists" obsessed with inflicting their demonstrably false and unworkable ideas on the world time, and time, and time (and time) again. At least if you read a Horeck or Price production you can put it out of your mind after a few years of therapy and rubbing all the skin off your hands trying to get them clean again. (Whatever your impulse, however, we do not recommend gouging out your eyes.)

The plain fact is that these very models of modern major nuisances (i.e., the "prominent academic economists") promote ideas that are not merely bad. If that was all, we could deal with it by replacing the bad ideas with better ideas. No, the problem is that the economics is profoundly incompetent, not even making a pretense at describing reality. Anything that doesn't fit in with their theories is explained away or dismissed outright, not explained. This is coupled with the snow job that for generations academia has pulled off by convincing the public at large that "prominent academic economists," as well as other denizens of the Groves of Academe unable to find honest work in the shambles they've left of the economy, actually know what they're talking about.

We could go on for days (and we have) cataloging the crimes of modern economists, notably all of them that derive their fundamental principles from the disproved (but not yet discredited) British Currency School of finance. For the sake of comparison, we can call Keynesian economics the Horeck, Monetarist/Chicago the Price, and Austrian as the Theis. (Austrians get off easy, if only because, within their framework, they strive for consistency with principles. They don't succeed, but they're at least sincere in adherence to something they think is liberty.)

For today, however, we will content ourselves with the definition of money, the bad definition of which is the economic root of all evil. (More fundamentally, it's the bad definition(s) of private property that abound that cause most of the trouble, but "money" is, in part, an application of the rights of private property as well as liberty.)

A long time ago, in a galaxy far, far away (before the Great Depression of the 1930s), people had not yet bought completely into the erroneous idea that all money comes from the State. No — money comes from actual, flesh-and-blood people who produce a marketable good or service, not votes to keep some politician who (if he or she feels generous) will redistribute a tiny amount to you from somebody else's wealth (after a rake off, of course), or mortgage future taxes — to be collected (if the government hasn't spent its way into bankruptcy) in the future out of what you and others might produce if you have any initiative left after being a degraded wage and welfare serf for so long.

"Money" is not some mysterious, mystical thing. It is simply a contract to deliver the present value of some marketable good or service on demand or on the occurrence of some future event. Issuing some kind of order doesn't make something money. What makes something money is accepting it in settlement of a debt. You can do this with a handshake, or just your word.

You don't need government to tell you that you can enter into a bargain — a contract — with someone else, and keep that promise. You need government to enforce that contract if one of you tries to get out of it, and to set standards so that everybody agrees on what an inch, a pint, or a dollar is, but government can't create any of these things.

Well, if government doesn't create these things . . . who does?

We do. And, by our natural rights of private property and free association ("liberty" or "contract"), we can exchange what we produce amongst ourselves with no interference, as long as what we're exchanging isn't illegal, although it can be immoral or fattening. The mechanism — the "medium" — by means of which we carry out these exchanges, that is, make promises to deliver marketable goods and services now or in the future, is called "money."

Even today, when the government (for our own good, of course) has taken over so much of the economy (and doing such a great job of it!), more than 60% of the money supply is not "created" by government in the U.S., that is, is not backed by government debt, but by private sector assets: the present value of existing and future marketable goods and services. This type of money is called "bills of exchange." It is better money, because it's asset-backed, than that Federal Reserve Note we hope you have in your pocket. (Federal Reserve Notes were also supposed to be backed by private sector assets, but that's another story.)

What this country needs is not more money imposed by fiat by the government, but genuine money that people create and use themselves, out of their own productive potential as owners of labor and as owners of capital. What kept many people alive in the second Great Depression (that of the 1930s — the first was in the 1890s when the "free land" from the Homestead Act ran out) was ownership of some capital that produced enough to provide them with food, clothing and shelter — after a fashion. The New Deal destroyed all but a few remnants of small ownership in America, and forced many people into dependence on State welfare, including Social Security.

Despite all the gloom and doom you hear these days about the economy, however, there is a relatively simple solution, and one that can be implemented with the stroke of a pen, just as the original Homestead Act was in 1862 over Abraham Lincoln's signature. It's called "Capital Homesteading," and it would empower every child, woman and man in the United States with the ability to create money to purchase new capital, the income from which would first be used to pay for the capital, and after that as consumption income.

In other words, instead of cutting consumption and saving in order to produce, people could produce, and then save. This makes much more sense, if you think about it. How can you cut consumption in order to produce something out of which you can save, if you don't first produce something?

With Capital Homesteading, the consumer demand that drives the economy would not have to be "created" by government with "stimulus packages" that only stimulate the greed of bureaucrats and corporate drones in failed companies, but be sustained naturally. As an economist named Jean-Baptiste Say explained in a letter to the Reverend Thomas Malthus (whose theories of economics are responsible for turning economics into "the dismal science"), we don't really purchase what others produce with this thing called "money."

No, we purchase what others produce with what WE produce. "Money" is just the medium by means of which we carry out the exchange if we don't want to cart our bushels of wheat or flocks of chickens around with us in a wallet. Thus, if goods remain unsold — that is, there is productive capacity but nobody is buying — it's because the people who want to buy aren't producing. As Say concluded, if we want what others produce, we must offer them what we produce, or there can be no exchange. Capital Homesteading is designed to turn everyone into a producer by being an owner of capital as well as labor.

Monday, November 21, 2011

An article in today's Washington Post is "déjà vu all over again." Rama Lakshmi's report from New Delhi ("In India, a Mountain of Trash Means a Living," Washington Post, 11/21/11, A7) on the plight of the people at the bottom of the social and economic scale who make their livings mining recyclable material from the garbage heaps highlights the fact that, however beneficial non-polluting alternate energy systems may be for the environment and the economy, it doesn't do much for the people who stand to lose what little they have as they are displaced by advancing technology.

Technological displacement is one of the most serious problems associated with technological advancement and economic growth in which everyone does not have an equal opportunity to participate. While alternate sources of energy are clearly desirable on the "macro scale," these and similar changes can and frequently do have a devastating effect on those who rely on the old system to make a living.

The solution is not to stop progress, however, but to figure out a way in which those displaced by advances in technology can benefit from those advances. In the case of the people who mine the trash heaps for recyclable materials, the answer is obvious, and was given by the late Louis Kelso in an editorial in a 1964 issue of Life magazine: "If the Machine Wants Our Job, Let's Buy It." How this principle can be applied in the situation you described is relatively straightforward:

First, rather than have the new energy plant owned by the government or a few rich domestic or foreign investors, it should be owned — and owned directly — by everyone in the area served by the power plant. This can be done by setting up a "Citizens Land Bank," or CLB. The CLB is a proposed ownership and financing vehicle that consists of a private joint stock corporation that is owned by everyone in the area by granting each citizen and permanent resident a single, no-cost, non-transferable, voting and fully participating share in the CLB. A CLB would take immediate title to all land and infrastructure currently owned by government, and gradually acquire other land and infrastructure as it comes on the market.

Second, change the basic method of finance for such financially feasible new industries. Instead of relying on rich domestic or foreign investors, bond issues, or inflationary government spending, finance the operation by drawing bills of exchange and either discounting them with other businesses and individuals, or at commercial/mercantile banks, that can rediscount the bills at the central bank. Collateral can be in the form of commercial capital credit insurance and reinsurance instead of the usual existing accumulations of wealth.

Third, give the displaced trash miners priority in getting jobs at the new energy plant.

Fourth, for those miners that the new plant cannot absorb — and 300,000 workers is far too many for one plant to hire — make capital credit available to start new enterprises that can absorb the "excess" workers as worker-owners. This is similar to a proposal by William Thomas Thornton, a clerk in the East India Company, in 1848 in A Plea for Peasant Proprietors. Thornton proposed that the Irish affected by the Great Famine of 1846-1852 be given the opportunity to become owners of land and other capital as a permanent solution to the problems that caused the Famine.

This is a very broad and sketchy outline of a proposal that we call "Capital Homesteading for Every Citizen" (from the book with the same title), that we believe has the potential to turn the global economy around in 18-24 months, but can effectively end world poverty except on an individual basis.

Friday, November 18, 2011

As predicted (by us), the latest round of "fixes" both abroad and domestically have proven to be nothing to write home about. With the fall in the stock market, the long sellers were probably able to drive up the market a little today, but everything is too uncertain for them to make anything more than a few billions to inflate GDP artificially. Government leaders still remain convinced that you can either continue spending or cut spending as the only solution to the problem, evidently not realizing that, without production, you can print as little or as much money as you like and it won't mean a thing. Further, if ownership of capital is not widespread, you can produce anything you like, but no one without capital ownership will be able to buy anything. As labor statesman Walter Reuther said in response to someone who twitted him that he'd have a hard time collecting union dues from machines in an automated car factory, "You'll have an even harder time selling them automobiles." To try and bring some sanity into the discussion, here's what we've been doing for the past week:

• The CESJ monthly Executive Committee meeting was held this past Wednesday. This was the 332nd consecutive monthly meeting since CESJ's founding in 1984.

• CESJ members have set up a Twitter network. There is not too much action going on right now, but it should pick up as people become more familiar with the technology.

• Norman Kurland received an e-mail from a Polish journalist who had interviewed Norm a while back for an article in a Warsaw newspaper on Blessed John Paul II and CESJ's interaction with the pontiff. The journalist stated that the head of Poland's central bank, the Polish National Bank, who died in the tragic plane crash, had been interested in the Just Third Way monetary reforms. Perhaps not coincidentally, the Wall Street Journal reported that Poland, of all the countries in Europe, had avoided an economic downturn, keeping the national debt to 55% of GDP, focusing on financing private sector development, and was concentrating on further reductions in the public debt.

• On Wednesday we received an e-mail message from a professor of economics in Buenos Aires asking for cites for some of our claims about Keynesian economics. We were able to provide him with material demonstrating the Keynes's hostility to broadened ownership dated from at least 1919, not 1936, as he had supposed.

• In preparation for the upcoming release of CESJ's edition of William Thomas Thornton's A Plea for Peasant Proprietors, we joined a number of Irish-themed LinkedIn groups. Not surprisingly, both the Irish and Irish-born and descended people are very concerned about the economy. One group is even running a contest to inspire people to come up with innovative ideas. We'll be submitting something on the Just Third Way, of course, but all members of the Just Third Way movement are encouraged to keep their eyes open for similar opportunities. Even if you don't win, it helps just to get the word out, as well as to clarify your own thinking to be able to summarize the Just Third Way on a contest entry form.

• A number of potentially effective CESJ projects are "languishing" for lack of adequate funding. As a case in point, the Thornton book was only made possible due to the fact that one CESJ member took it on as a personal project and others were able to devote many hours of unpaid time to the effort. CESJ will, of course, accept "retro" funding for the Thornton book or any other project, but we need to find donors/grant makers for a number of other critical projects. Keep your eyes open for an individual or foundation willing to grant or contribute $5,000 or more a year for two to three years to CESJ to fund one of the many "small" publishing projects we have waiting in the queue. (Smaller — and larger — donations to the general fund are, of course, always acceptable.) Donors will be noted by name in an acknowledgements section in the publication, unless anonymity is requested, and provided with an accounting of how the money is spent — and, of course, have the right to purchase copies in quantity at or below wholesale.

• One project that is not small is the funding of an econometric model for binary economics. Unlike most CESJ projects, we do not have the capacity to handle this "in-house," and will have to rely on another institution.

• As of this morning, we have had visitors from 57 different countries and 53 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia, and Bulgaria. People in Australia, India, Germany, Singapore, and Austria spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "How Joe Lunchbucket Could Get Money for Capital Homesteading," "It's the Academics v. the Politicians . . . v. Economic Reality, Part I: Accounting," and "The Keynesian Multiplier."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, November 17, 2011

We got a number of questions recently that we couldn't answer. Well, we could answer them, but we couldn't — if you know what I mean. (I've been hanging around too many Irish-themed groups on LinkedIn, evidently.) Anyway, the questions implied a level of misinformation about money and credit that had to be corrected before we could answer the questions. (Is that any more clear?) So here goes.

"Money" is not limited to coin, banknotes, and checks. Money is anything that can be accepted in settlement of a debt. In fact, you can have something that claims to be money, but is not money because no one will accept it. In a free society, it is acceptance of something in settlement of a debt that makes something money, not the command of some authority, even the State itself. Only acceptance makes something truly money.

"Credit" is simply another form of money, or money in another form — whichever way you want to look at it. All money/credit is a promise to deliver marketable goods or services. This can be on demand, or on the occurrence of some future event, such as a due date. Money is valued at whatever the promised good or service is worth at the present time. If the good or service currently exists, and the person accepting the "money" is reasonably certain that the issuer of the money (maker of the promise) will deliver the goods or services when required, then the money is good and has a high value because it conveys real value among the people who accept it. If the good or service currently exists, yet there is some doubt that the issuer will keep his word, the money will have a low value, or won't be accepted as money at all.

We can extend this to goods and services that don't even exist at the time the promise is made. I can promise to deliver $1,000 worth of widgets to you in 90 days, and draw up a contract to that effect. I don't have any widgets. You know I don't have any widgets. If, however, you are reasonably certain that I can either obtain or manufacture widgets in the allotted time and will make good on my promise, you will accept my note — my "money." If you don't think I can deliver, you will not accept my note, and it never becomes money.

Naturally, even though you and I can both agree that I am reasonably certain that I can and will deliver $1,000 worth of widgets to you in 90 days, that is still in the future. $1,000 worth of widgets today is worth more to you than $1,000 worth of widgets in 90 days. This is where the concept of "present value" comes in, or "What is the value today of my promise to deliver $1,000 worth of widgets to you in 90 days?"

We decide between us that $1,000 worth of widgets in 90 days is worth $980 today. In financial terms, you discount my note at 2%. This is NOT an "interest rate." It is a recognition that $1,000 in 90 days is only worth $980 today. This is the "time value of money," which is actually misleading because the terminology makes it sound as if money has value simply because it is money. No, money has value because of the strength of the promise behind it.

Then there is the issue of risk, or the possibility that I won't be able to deliver $1,000 worth of widgets as promised. There are two things to consider when dealing with risk. One, what is the statistical probability that I won't be able to pay? Two, what have I got to give you to prevent you from suffering a loss if I cannot keep my word?

The statistical probability that I won't be able to pay can be quantified. This is how insurance works. For example, let us assume that, historically, 9 out of 10 people who promise to deliver $1,000 worth of widgets in 90 days actually do so, to the full satisfaction of both parties to the agreement. One out of every 10 fails to do so. The risk of failure is therefore 10%. The "risk premium" that you factor into the value of the note is 10%. The note I gave you is worth, today, $880, not $1,000, because the $1,000 face value of the note is discounted 2% for the present value of $1,000 in 90 days, and another $100 because of the risk that I might not be able to pay. In 90 days I must pay you $1,000 worth of widgets, but you only accept my note today for $880.

Even then, you can't take the risk of a loss. You demand that I pledge existing assets worth $1,000 so that you will be more sure of getting the value of $1,000 worth of widgets in 90 days should I not keep my word. These existing assets are called "collateral."

Okay. That's the first part of the "pre-answer answer." We'll try and get to the second part on Monday, after pausing for station identification tomorrow with our weekly news items.

Wednesday, November 16, 2011

Early this morning we received an e-mail from Argentina from a professor of economics who teaches at the Universidad de San Andreas and is with the International Monetary Fund, in response to a comment we posted in a "LinkedIn" group about Catholic teaching on private property in capital. We had made a reference to the fact that Keynesian economics views widespread ownership of capital as undesirable, and this had been embedded in the New Deal. As Keynes declared in his General Theory of Employment, Interest, and Money (1936), economic policy should be directed, in part, to the elimination of the small, "functionless" investor from the economy, what Keynes called a gradual "euthanasia of the rentier," a "rentier" being a small investor who lives off the income from his or her investments.

Dr. JB's comment was natural for someone who is probably most familiar with Keynes from his most famous work, The General Theory. As a scholar, he asked, "But Keynes wrote his General Theory in 1936! Could you please send me a concrete citation where 'Keynesian economics' is against 'ordinary people having capital'? Regards, J.B."

First off, please note the courtesy of Dr. J's comment. We're used to correspondents who simply blast out that Keynes was right, and that the world is necessarily enslaved to this Great Defunct Economist, whose genius has never been nor could ever be surpassed in this or any other age. So this response was easy. All we had to do was point out that Keynes wrote The Economic Consequences of the Peace, the book that established his reputation, in 1919. In Section III of Chapter 2 of that book, Keynes declared, "The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably."

Since the Universidad de San Andreas is a Catholic institution, we thought we'd also better make it clear that Keynes's whole orientation and basic philosophy is directly contrary to the natural law, and thus to Catholic social teaching. Consequently, we added that Keynes's Treatise on Money, which assumed concentrated ownership as a given, was published in 1930; von Hayek's refutation of the Treatise in part on the grounds of its collectivism, missed the most collectivist/socialist aspect of the entire two volume work, on the second page of volume one where Keynes declared that the absolutist State has the power to alter contracts at will and "re-edit the dictionary," i.e., change the substantial nature of things.

We then added a comment that, in our opinion, internal evidence in the General Theory suggests that Keynes put the volume together in a hurry in an effort to refute the work of Dr. Harold G. Moulton, especially in The Formation of Capital (1935), but without mentioning Moulton's name. It's possible that, as president of Brookings since 1916, Moulton was a force to be reckoned with, and the two pretty much diplomatically "ignored" each other. Moulton's only explicit reference to Keynes that we have been able to find is in The New Philosophy of Public Debt (1943), in which Moulton lambastes the Keynesian notion that there is no danger in having a public debt even twice GDP.

But wait! There's more! We also referred Dr. J to Dr. MTRDPL, who teaches commercial law at the Catholic University of Buenos Aires. Dr. M has a good grasp of Kelso's "binary economics," and has been working on a Spanish translation of Ashford and Shakespeare's Binary Economics: The New Paradigm (1999).

We also thought that Dr. J might want to get in touch with Dr. Norman G. Kurland, president of the Center for Economic and Social Justice in Arlington, Virginia, who is one of the leading authorities on binary economics. Of special interest to a professor at a Catholic institution of higher learning is the fact that Norm met with Blessed John Paul II in a private audience with members of Polish Solidarity in 1987, and received His Holiness's encouragement of CESJ's work. The late Father John H. Miller, C.S.C., S.T.D., head of the Central Bureau of the Catholic Central Union of America in St. Louis, Missouri, USA, said that Dr. Kurland, while not a Christian, has a better understanding of Catholic social teaching than most Catholics.

Finally, we asked Dr. J (if he felt inclined) to comment on our upcoming republication of William Thomas Thornton's 1848 classic, A Plea for Peasant Proprietors, to which we have added a number of appendices updating Thornton's proposal as a possible solution to the current global economic crisis.

You never know. If someone is bold enough to introduce the Kelso ideas into the IMF and the World Bank, and the Capital Homesteading proposal is adopted anywhere in the world in the next six months, you would see an astonishing turn around in the global economy. (In a good way, of course.)

Tuesday, November 15, 2011

The problem with discussing today's economic problems (at least in part) is the fact that when the subject is money and credit, a lot of the terminology is pretty old, and yet the terminology in economics is relatively new, mostly rooted in Keynes's "re-editing of the dictionary" in an effort to force his unworkable system at least to sound plausible.

That's not to say that Keynes and the Keynesians, neo and otherwise, don't believe absolutely in their assumptions and the system(s) based on those assumptions. The problem is that the assumptions, especially about money and credit, are just plain wrong.

Be that as it may, we have to give a mercifully brief, and unmercifully short (and thus possibly misleading) glossary of some financial terms that today's economists and politicians either reject or redefine, thereby distorting their understanding of economic reality. This is actually pretty simple.

What are those things? A "mortgage" is something handing over ownership of something that exists right now.

A "bill of exchange" is something handing over ownership of something that the hander-over doesn't have right now, but expects to have when whoever has the bill presents it on the due date.

A "bill of credit" is something handing over ownership of future tax collections by the government.

A bill of credit is unique in that it hands over ownership of taxes that the government won't own unless the taxpayers both allow the government to tax, and the government is actually able to collect the taxes. Someone who issues a bill of exchange has to produce a marketable good or service or the value thereof to redeem his or her promise. A government that issues a bill of credit relies on somebody else producing marketable goods and services that can be taxed.

As you can see, this is pretty straightforward, but it does let you in on a Big Secret: Government does not create money by issuing bills of credit. No, the commercial banks and the Federal Reserve create money by accepting bills of credit.

Here's another Big Secret: private sector bills of exchange, being asset-backed, are better money than government bills of credit, which are debt-backed. The Federal Reserve, in fact, was invented to create money backed by private sector bills of exchange, not government bills of credit.

The primary business of the Federal Reserve was supposed to be creating an "elastic currency" by rediscounting bills originally discounted by its member banks, thereby backing the currency with private sector hard assets. "Open market operations" were only supposed to supplement rediscounting, and even then be limited to bills and notes issued by private sector businesses, individuals, and non-member banks. The government wasn't supposed to be able to sell its debt to the central bank — and a good argument can be made that it isn't supposed to create money in any way, shape, or form.

Anyway, we should be focusing on returning the Federal Reserve to its original mission of financing private sector development, not government operations. Let the government live off tax revenues, the way the Founding Fathers intended, thereby giving taxpayers a little control over the politicians.

Monday, November 14, 2011

A great many people (some of them even experts) believe that banks create money "out of nothing." In our previous posting in this series, we discovered that is not the case. Banks of issue (banks of deposit don't create money at all) create money the same way anybody creates money: by accepting something as money. If you (or a bank) accept something as money, then it's money. If you (or, again, a bank) don't accept something as money, then it's not money.

Yes, it really is that simple.

Now let's complicate things. When people create money between them (it takes two to make money, just as it takes two to tango), they exchange promises. The promises that a bank of issue takes in exchange for its promissory notes are called "bills of exchange." Now comes the confusing part. Bills of exchange are divided into mortgages, bills of credit, and . . . bills of exchange.

Whoa, you say. "You mean a "bill of exchange" can be a mortgage, a bill of credit and a bill of exchange?" That's right. It's confusing, but we didn't invent this terminology. "Bill of exchange" is both the generic term and the term for something specific. It's sort of like (but not much) when people refer to all cola drinks as "cokes," which really upsets the Coca Cola Company, which has trademarked "Coke," along with "Coca Cola" and the shape of the bottle, and works valiantly to prevent its brand name from becoming generic, as happened with the Zipper slide fastener. (Now you know why those restaurant workers chant their mantra, "Wedon'thavecokewillpepsibeokay?").

A bank of issue takes the bill of exchange (whether it's a mortgage, bill of credit, or bill of exchange), presumably looks it over to see if it's "good" (i.e., does the asset behind the mortgage exist and is it in the condition described, is the "drawer" creditworthy and of good character, is there sufficient collateral, blah, blah, so on, so forth), and if everything is hunky-dory (obsolete slang for "okay"), the banker takes the bill, and the borrower signs a promissory note issued by the bank.

Here's where it gets a little more complicated. The guy who issued or "drew" the bill of exchange could have used it as money directly . . . assuming that someone would accept it. This actually happens a lot. Somebody draws up a contract, and offers it to somebody else. If the "somebody else" accepts it, then it's money. If it is not accepted, then it's not money. See? Anybody can create money.

. . . anybody, that is, except those who are not creditworthy, have bad character, no collateral, and whom nobody knows. That's where a bank steps in. Everybody knows a bank. A bank's business is to be creditworthy, have good character, and obtain good collateral for all its loans.

Now you know more about how a bank creates money than most politicians and economists. Tomorrow we'll try to get around to explaining some of the more esoteric terms by means of which the experts baffle real people.

Friday, November 11, 2011

Not unexpectedly, the stock market is shooting up again as a new government is installed in Greece and Italy promises austerity measures. Since there is nothing behind either action that offers any real hope that necessary and substantive reform of the financial and ownership systems will be implemented, we can expect the riots to commence as soon as people realize that no solution has been offered. In the meantime, here's what we've been doing to offer a real solution:

• CESJ's Director of Research returned Monday from a brief sojourn in Lancaster, Pennsylvania. While most noted for religious groups who settled there to avoid becoming dependent on government or the surrounding culture (e.g., the Old Order Amish), old time residents are noting that a significant number of institutions, formerly private initiatives but that have become dependent on federal and state subsidies over the years, have been rapidly disappearing. As a result, Lancaster County's unique heritage is in danger of becoming assimilated into the general culture. Capital Homesteading would allow both a restoration of the tax base to support unique cultural institutions, as well as make those same institutions less dependent on government subsidies for survival. Yet another reason to push for Capital Homesteading by 2012.

• Norman Kurland met with an official from the Israeli Embassy on Tuesday of this week. The official was intrigued by some of the Just Third Way ideas, but could not reconcile the Just Third Way's inclusive approach with the exclusive nature of a specifically religious State. There was, however, agreement that, with the rapid increase in lack of understanding of fundamental institutions like private property, money, credit, banking and finance, the recent upswing in anti-Semitism is threatening to become a tsunami as people search for someone to blame for badly structured institutions when the solution is readily available in Capital Homesteading.

• On Thursday, Norman Kurland had a telephone conference with some people from the Detroit Shoreway Community Development Organization (N.B. — "Detroit Shoreway" is a neighborhood in Cleveland, Ohio, not an area of a city in Michigan), or "DSCDO." The DSCDO is involved in revitalizing the ethnically diverse neighborhood, with civil theater, an arts district, block clubs and an Ecovillage. The DSCDO is under "ESOP," which in this case stands for "Empowering and Strengthening Ohio People." The meeting was very positive, and the participants indicated that they would be investigating the Just Third Way concepts of the Citizens Land Bank and the Homeowners Equity Corporation in much greater depth for possible application.

• As of this morning, we have had visitors from 56 different countries and 51 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia, and Bulgaria. People in Australia, India, Germany, Austria, and Sweden spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Paradox of Thrift," News from the Network and "Keynesian Economics: Socialism Lite."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, November 10, 2011

The "in" term right now for bankers is "banksters." The printable term, anyway. This has the advantage of being moderately clever, easy to remember, sets up an immediate association with organized crime, and dehumanizes those who are believed to be beyond redemption.

The problem with this (aside from the obvious one of condemning others on the basis of opinion instead of fact and argument) is that those who are doing the labeling and condemning all banks often aren't too certain of what, exactly, a "bank" is. They know it has to be something evil, or the typical bank wouldn't be so big, would give them money for free instead of charging something called "interest" or making them work for it, and wouldn't make them stand in line for endless minutes while somebody ahead of them argues with the teller over why the customer can't cash a third party check drawn on a bank in the Cayman Islands for more than the bank's vault cash.

The problem is that most economists aren't too clear themselves what a bank is or does. For example, in common with the general public, most economists are completely unaware that there are two kinds of banks! This is due to the fact that your modern major economist tends to be a Keynesian, Monetarist/Chicagoan, Austrian, or some derivative therefrom. Virtually every academic economist — and the politicians who listen to them — thus defines a bank as a financial institution that takes deposits and makes loans.

That is correct as far as it goes. That definition covers things like investment banks, credit unions and savings and loans. It neglects, however, the far more common and important type of bank, defined as a financial institution that takes deposits, makes loans, and issues promissory notes. The most common types of this kind of bank is the commercial or mercantile bank, and central banks. The Big Economic Issue here is that, not understanding what a promissory note is or where it comes from, economists (and politicians) aren't going to understand what "money" is.

Here, then, is your mini course in banking theory. A "bank of issue" issues a promissory note (which is why it's called a "bank of issue . . ."). A bank can't just do that, however. A bank can only issue a promissory note in exchange for . . . a promise! Not only that, the promise actually has to have value, and that value has to be quantified. This is where some accounting comes in handy again, because "the measurement principle" in accounting is that if you can't measure it in terms of money, you can't account for it.

Banks don't create money out of nothing, but out of promises that have something behind them. If the promises aren't good, nobody will accept them, and it's "acceptance" that turns something from an offer into a contract, a promise . . . that is, "money."

On Monday — assuming we last that long, if the economists and politicians don't cause a global economic meltdown in the meantime — we'll get into the mechanics of how banks create money by accepting promises from some people, and exchanging them for promises that can circulate in the economy (which explains why "banks of issue" are also called "banks of circulation").

Wednesday, November 9, 2011

Deviate from Keynesian economics As She Is Taught, and you risk getting labeled an economic ignoramus. According to Dr. Jonathan Lanning, a professor at Bryn Mawr who teaches introductory economics, neither the Democrat nor the Republican candidates have a "truly comprehensive understanding of even basic economics." (Charles Riley, "Economics: Presidential Candidates Slip on Econ 101," CNN Money, 11/09/11.)

We couldn't agree more. Unfortunately, that "comprehensive understanding" of basic economics derived from fundamental concepts such as private property, money, credit, banking, finance and (lest we forget) accounting continues to elude academic economists as well. The article is filled with thinly (and not-so-thinly) veiled contempt for the presumably nutty ideas being espoused by the current crop of presidential candidates, with special emphasis on those spouted by the Republican Crazies, who tend to be slightly less socialist than the Democratic Dements.

Take, for example, accounting. Accounting is the "language of business." Business is what we call it when people engage in producing marketable goods and services to meet the wants and needs of themselves and others. Economics is the study of how people meet their wants and needs. Thus, accounting is the language of economics. Nevertheless, we're tempted to put money down on the chance that not one academic (or other) economist in 10,000 can explain the "accounting equation" in meaningful terms: "Assets = Liabilities plus Equity."

You know why? Because the accounting equation is a statement based on the concept of private property. On the one side you have "Assets," that is, what is owned. On the other side you have "Liabilities" and "Equity" — who owns (has a legal claim on) the "Assets." Equity is what is the amount of the assets of the business owned by people inside the business. Liabilities are what people outside the business own.

Finance? Finance is the science of figuring out how to pay for capital. Rule Number One in finance is, "Don't buy any capital that doesn't pay for itself." Period. Don't do it. Do it, and you'll go bankrupt . . . unless the government decides you're too big to fail and bails you out, but that's another story.

Tuesday, November 8, 2011

This is getting to be quite a habit with us. Writing open letters to George Melloan of the Wall Street Journal and points east, west, south, and north, that is. In other words, we don't quite know how to go about getting in touch with Mr. Melloan, so we've been doing the internet equivalent of going around the web with a bullhorn. (We also sent something c/o the Wall Street Journal.) Anyway, here's our latest.

Dear Mr. Melloan:

As a result of reading your articles, "Obama's Perplexing Populism" (WSJ, 11/04/11, A19) and "A Free-Trade Plan to Save Japan" (WSJ, 11.07/11), may I offer some input? Much of the ineffectiveness, even damage caused by the efforts to save the U.S. and various economies around the globe is, in my opinion, due to a reliance on outmoded monetary and fiscal policies that serve only to strip ordinary people of economic power and concentrate that power in private and public sector elites. What can be regarded as the four "pillars" of an economically just society are undermined by this concentration of power:

• A limited economic role for the State,

• Free and open markets as the best means of determining just wages, just prices, and just profits,

• Restoration of the rights of private property, especially in corporate equity, and

• Widespread direct ownership of capital, individually or in free association with others.

This last, widespread direct ownership of capital, is the "fatal omission" from every economy on earth, and the reason why the other three are emasculated. Power, as Daniel Webster reminded us in the Massachusetts Constitutional Convention of 1820, naturally and necessarily follows property. Webster did not refer to consumer goods, even a primary dwelling, but landed, industrial, and commercial capital that produces marketable goods and services.

The necessity of as many people as possible owning capital in addition to their labor has been recognized from the earliest times, but has increased in urgency as technology advances and displaces labor from the production process at an accelerating rate. In 1848 William T. Thornton published A Plea for Peasant Proprietors, a proposal to end the Great Famine in Ireland. The plan was based on making land available at a reasonable cost to the Irish to enable them to shift to other sources of food. Abraham Lincoln's 1862 Homestead Act helped America recover from the Civil War and the shift from cotton to wheat. In 1891, Pope Leo XIII declared, "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." In the early 20th century Peter S. Grosscup, one of Theodore Roosevelt's "trust busters," advocated "people-ization" of America's corporations by spreading out ownership.

The list could go on endlessly, but what was needed was a viable means of financing capital acquisition by people who had no accumulated savings and could not afford to cut consumption in order to save. In the late 1950s and early 1960s, Louis O. Kelso and Mortimer Adler, building on the work of Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, developed a financially feasible plan whereby workers could become owners of the corporations that employed them. Their two books, The Capitalist Manifesto (1958) and The New Capitalists (1961), detailed their proposal that became the Employee Stock Ownership Plan (ESOP), which was embodied in U.S. law after 1973 when the late Senator Russell Long of Louisiana championed the initial enabling legislation.

The main question, of course, was how, without raising taxes or redistributing existing wealth, through inflation or otherwise, could someone without existing savings or the capacity to reduce consumption acquire and possess capital? The answer was given in the subtitle of Kelso and Adler's second book, "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

The "problem" here is obvious. Keynesian, Monetarist/Chicago and Austrian economics are all based solidly on the assumption that the only way to finance new capital formation is to cut consumption, accumulate money savings, then invest. Moulton completely disproved this assumption in 1935 in The Formation of Capital, presented as an alternative to the Keynesian New Deal. Moulton explained how, by discounting and rediscounting "bills of exchange" drawn on the present value of existing and future marketable goods and services, commercial banks and the central bank (the Federal Reserve) can create an elastic, asset-backed currency to replace the government debt-backed currency that has stifled growth and concentrated wealth in the hands of a few. The potential of "pure credit," that is, credit that is not dependent on existing accumulations of savings, is bounded only by what can be produced in the future, not by what has been withheld from consumption in the past.

Kelso and Adler added two critical improvements to Moulton's work. One, replace traditional collateral with capital credit insurance and reinsurance, using the risk premium charged on all loans as the premium on an insurance policy. Two, make certain that all new capital financed using pure credit is owned by people who previously owned little or no capital, and who will use the income first to repay the capital acquisition loan and then to meet consumption needs instead of reinvestment.

In order to restore the global economy in the shortest possible time, it is essential that the United States implement a program of expanded capital ownership at the earliest possible date. We at the Center for Economic and Social Justice (CESJ) have developed a proposal to do just that. Following up on Ronald Reagan's call in 1974 for an "Industrial Homestead Act," we propose a "Capital Homestead Act" to duplicate and even improve on the economic power and rapid growth potential unleashed by Lincoln's land-based Homestead Act.

I believe that some time ago you corresponded with Dr. Norman Kurland, president of CESJ, on this topic. In view of your writings on the current world situation, Dr. Kurland is most interested in reopening the discussion with you. I can help in setting up a good time for a telephone conversation at your earliest convenience.

Monday, November 7, 2011

One of the most common comments that comes up when talking about Capital Homesteading is, "It's a nice idea, but where are you going to get the money? You can't get money except by saving it yourself or borrowing it from somebody who has saved. You can't afford the interest payments on that. That's capitalism. The only other way is to redistribute, that is, take the money away from somebody else who has saved. That's socialism."

The answer? The belief that you can't get money for investment — to buy capital — except by saving it yourself or borrowing it or just taking it away from somebody who has managed to save is true . . . as far as it goes. This belief, however, assumes that the only way to save is to cut consumption and accumulate cash. This is what Kelso and Adler called "the slavery of past savings."

There is another way: Let the capital pay for itself out of its own future earnings. Anybody can "create money" by promising to pay for something he or she receives now in the future and having the promise accepted. It's called "credit." When it's used to purchase food, clothing and shelter (consumer goods) now and pay later, it's called "consumer credit," and it's pretty much the worst form of credit. When it's used to purchase capital that pays for itself out of future earnings, it's called "capital credit," and is the very best form of credit — and of creating money.

This is called "future savings." Instead of reducing consumption in the past or now to finance new capital, increase future production from new capital that you've promised to pay for out of future profits. You don't save to save now, produce later. You can produce now, and save later. In other words, get "credit." Credit is nothing more than a promise to repay a loan out of future profits. You can use the promise itself as money to buy capital, then use what the capital produces to repay the loan. It's a lot easier and faster than saving now and then producing later.

It could work this way. Joe Lunchbucket gets a notice in the mail from the government that the Congress passed the Capital Homestead Act of 2012. A government survey of the capital growth needs of the economy has determined that in the coming year new and existing small and large for-profit companies want to sell $2.31 trillion worth of newly-issued, full dividend payout, full voting shares to meet their growth and modernization needs in response to the demands of their U.S. and global customers. The Act gives all financially sound companies a way to invest in new capital and create jobs to meet new customer demand for new and better products and services and even begin to construct and modernize new infrastructure through citizen-owned for-profit corporations.

The notice informs JL (that's "Joe Lunchbucket") that, as a new right of citizenship under the Act, like the political ballot, Joe has the right, if he chooses, to receive a free government-issued Capital Credit Card that for the coming year will entitle Joe to receive free of charge capital credit to purchase $7,000 worth of the newly-issued shares of "qualified" companies with interest-free "new money." The Capital Credit Card isn't money, but it allows Joe to get credit, another form of money, to buy capital that can pay for itself.

Joe will not be at risk if the loan cannot be paid off, because the loan will be insured by one of several "qualified" private capital credit insurance companies and reinsured by a for-profit capital credit reinsurance company established by many capital credit insurers. Joe's loan is to be entirely backed by the anticipated profits in the form of dividends on each of the "qualified" shares that Joe, with his advisors, decides he wishes to buy, with added backup from the capital insurance pool if the shares fail to earn a dividend. After the loan on each of the shares is repaid, Joe will receive dividends directly as "supplemental income" over and above income received from his work and all other sources.

The notice would also inform him that he should go down to his local commercial bank that is a member of the Federal Reserve System to set up in his name a "Capital Homestead Account" (CHA). Like an Individual Retirement Account ("IRA"), a CHA would be a "tax-shelter" for Joe to build up a growing accumulation of income-producing investments to meet his future consumption needs. Joe's CHA is designed to distribute dividend incomes during Joe's working career as well as when Joe retires or becomes disabled.

Joe's Capital Credit Card would authorize his CHA "tax shelter" to be the legal vehicle for receiving each loan to purchase "qualified" shares that Joe wants to buy from the market — and would allow Joe to defer taxes on the income used to purchase the shares until he takes the assets out of the CHA or dies . . . at which point the assets become income to Joe's heirs, not to the estate. The heirs, not the estate, pays taxes, unless the heirs put the assets into their own CHAs, in which case taxes are again deferred.

Each loan for buying shares would take the form of a promissory note backed with a "bill of exchange" that Joe "draws" or "issues." Joe's bill (which, like any bill, has to be paid) is backed in turn by the full stream of future profits paid out to Joe's CHA. These anticipated (but obviously uncertain) future profits would in turn be backed by the "future savings." These future savings take the form of the future capital goods and future consumer goods and services that the company issuing the shares expects to produce with the money the companies receive from the sale of shares to Joe's CHA.

The bank "discounts" Joe's bill of exchange (gives him less than the face value of the bill), issuing a promissory note in return. The discount covers the cost of the bank's own services and the risk premiums to be paid out of future dividends expected on the shares purchased by Joe's CHA. Each bank's promissory note is thus a form of asset-backed "money" over and above money issued by the government in the form of coins and official currency. Bills of exchange discounted by member banks of the Fed can be rediscounted in the financial markets or directly at the (re)discount window of the regional Federal Reserve Bank to be backed by the Fed's promissory notes: newly-issued currency or Fed demand deposit accounts under Section 13, paragraph 2 of the Federal Reserve Act. In other words, "money" is anything that can be used in settlement of a debt, and new capital credit can be created in ways that it can be repaid entirely with "future savings," making it possible for today's propertyless to own future capital.

Friday, November 4, 2011

Not unexpectedly, the antics of the stock market bear little relation to what is happening in the real economy that produces marketable goods and services . . . or to the principles that should govern the secondary market in debt and equity. The name, "secondary market," gives you a good clue as to how to view it: a second-hand shoppe. That's for high-class establishments. Lesser places sell "pre-owned" items and "junque," while everyone else sells "used." At least the Just Third Way doesn't peddle "used" ideas. Since they've never been implemented as a total package -- although every piece has been tried and tested and not found wanting -- all it needs is a leader with vision. To surface someone (or several someones) like that, here's what we've been doing for the past week:

• Michael D. Greaney, CESJ's Director of Research, is currently on vacation in Lancaster Country, Pennsylvania. It is interesting to see how, even in those areas where the Amish congregate, there is still a heavy reliance on advanced technology to keep things running. The key is not to eliminate advanced technology, but put it directly under the control of the people who use it through ownership.

• Norman Kurland was interviewed on blog radio this past week. The host, who had never heard of the Just Third Way ideas before, was enthusiastic.

• Monica W. and Norm met with a city council member in Cleveland via telephone. We don't have a full report of the meeting yet, but we assume it went well. The hard part is not getting people to understand the social and economic principles of the Just Third Way. The hard part is getting past the "gate keepers" who decide what prime movers will and will not hear.

• On November 4, Monica, Jackie and Norm met with the people from the "ESOP" organization, "ESOP" in this case meaning "Empowering and Strengthening Ohio People." They have expressed interest in the concept of people becoming rent-to-buy tenants in the homes they formerly owned before foreclosure.

• CESJ recently launched its "twitter" campaign. It's small right now, but as soon as we become familiar with the technology and the techniques, we'll be expanding.

• On Wednesday we began promoting William Thornton's book, A Plea for Peasant Proprietors. If you'd like an e-copy for comment or review -- or to pass around to others who might want to comment or reivew -- let us know by sending an e-mail to publications [at] cesj [a dog goes here] org.

• As of this morning, we have had visitors from 56 different countries and 50 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, Canada, the UK, Bulgaria, and the Philippines. People in Australia, Egypt, Germany, the United States, and Sweden spent the most average time on the blog. The most popular postings this past week were "Thomas Hobbes on Private Property," "Aristotle on Private Property," "The Perils of Ignoring History," "The Paradox of Thrift," and "Zombie Bot Slaves from Mars."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.